Government Boosts October Spending To Stimulate Economy Before

Here are 6 of the 16 bullet points in this report.

• Treasury supply has been light and will continue to be light until the end of month settlement. Supply has not been and will not be a constraint on the markets in the short run.

• The Fed is funding most of the mid month supply with concurrent MBS purchase settlements that cash out the Primary Dealers enabling them to absorb new Treasury supply. The total of those settlements is enough to pay for nearly all of the new Treasury supply. That tilts the playing field toward the bulls both in bonds and stocks on the supply side.

• Sentiment and therefore demand may shift away from bonds and toward stocks as economic data continues to come in positive. With ongoing signs of economic growth and indications that inflation is picking up, reduced Treasury supply will result in excess liquidity that is likely to flow more toward equities and commodities.

• The Treasury continues to have the good fortune of seeing very strong growth in tax collections through September and carrying over into October, with nominal year over year growth now at 7.2%, and real growth at 3% give or take, depending on actual underlying inflation and weekly average earnings growth. There was a big surge in average weekly earnings in September, up 4% with 1.5% coming from an increase in hours worked, and 2.5% from higher average hourly earnings, suggesting that inflationary pressures may be building.

• Economists have seen the economic data consistently outperform their forecasts for September. Using their usual rear view mirror method they will adjust their forecasts for October upward. Withholding taxes now 3% ahead of the same period last year in real terms suggest that economic data is likely to continue to show growth, but forecasts have probably caught up. Therefore upside surprises are less likely in October economic data releases.

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This entry was posted on October 14, 2012 at 8:00 am and is filed under Money and The Fed, Professional Edition. You can follow any responses to this entry through the RSS 2.0 feed.

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